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CREATING AN ENABLING

LEGAL AND REGULATORY

FRAMEWORK

Prof. Maria Chiara MalagutiSenior Legal Advisor

World Bank

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FROM GENERAL PRINCIPLE 3 TO THE 2009 REMITTANCES SURVEY

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A. GENERAL PRINCIPLE 3 OF THE 2007 GENERAL PRINCIPLES FOR INTERNATIONAL REMITTANCE SERVICES

General Principle 3 recommends, inter alia, that

remittance services should be supported by a

sound, predictable, non-discriminatory and

proportionate legal and regulatory framework in

relevant jurisdictions.

However, it does not call for the establishment of

a specific legal regime for remittances.

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• Given the multiplicity of legal and regulatory frameworks, General Principle 3 does not recommend universal harmonization of laws and regulations, but advises that national authorities and RSPs participate actively in the implementation of the General Principles, and possibly adopt measures of self-regulation.

• However, a standardization of regulatory approaches would significantly improve the soundness and predictability of the legal and regulatory framework for remittances across frontiers, facilitate bilateral and/or regional agreements and favour contractual standardization by the private sector.

• If this exercise is made in full cooperation with the private sector, this would also improve the general understanding of the market and permit the sharing of best practice, without limiting unduly the autonomy of national authorities to regulate the sector.

• This standardization, if also focused on competition and competitiveness of the market, as well as the protection of users, would intrinsically lead to lower prices and improved service.

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B. 2008 QUESTIONNAIRE TO NATIONAL AUTHORITIES AND

GLOBAL PAYMENT SYSTEMS SURVEY 2008

In 2008, a questionnaire on the legal and regulatory frameworks for remittances was sent to the regulators in all Latin American and Caribbean countries in order to assess the implementation of General Principle 3.

In parallel, the Global Payment System Survey 2008 answered by 142 countries also provided information on the frameworks for payment systems including remittance services.

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Major issues arising from such surveys

• In some countries only financial institutions can provide payment services and consequently non-licensed institutions are prevented from offering remittance services.

• In others, RSPs are appraised for their commercial activities and are required to register or obtain a specific licence restricted to money transfers or some limited ancillary services. This might involve minimum requirements, not necessarily consistent with those of financial institutions providing payment services.

• Finally, in other countries, RSPs are not themselves regulated and generally remittances are covered only when executed by financial institutions. Other entities are unregulated.

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• Moreover, according to the different treatment received, RSPs may or may not directly access payment systems. For the most part, non-financial RSPs access those systems as indirect participants via regulated financial institutions, or even more restrictively any non-bank provider access those systems as indirect participants via a bank.

• As regards senders, in most countries only those RSPs which are licensed or registered are required to comply with AML/CFT requirements, usually only when they are financial institutions.

• Frequently, several public authorities are involved. For instance, the supervisory authority may be located outside the central bank, and possibly be in charge of registration/licensing of RSPs, although oversight of the national payments systems (and specifically retail payments) is the responsibility of the central bank. If the central bank is involved, registration or licensing of RSPs might be the responsibility of the supervisory division, whereas oversight of retail payments is handled by the operations division. This can give rise to inconsistency and lack of co-ordination both within and between the countries.

• Larger and well managed RSPs are generally better equipped to manage risks and to comply with regulations or codes of conduct, as well as to deal with onerous administrative procedures. Smaller firms may struggle to do so. Nevertheless, larger RSPs are more frequently under stringent scrutiny from the authorities, whilst smaller RSPs do not get such consistent monitoring.

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C. 2009 GLOBAL QUESTIONNAIRE TO THE REMITTANCES PRIVATE SECTOR

• In addition to inquiries with regulators, it was deemed useful to collect the views of the industry, considering that RSPs are in the frontline, experiencing on a daily basis the limits, constraints and opportunities of the regulatory frameworks they operate in, and, in some cases, suffering from the variety of approaches in the different countries they work in.

• In this vein, a questionnaire specifically adapted to the needs of the private sector was prepared and sent to RSPs operating in all regions. More than sixty responded. The RSPs surveyed consist of a diverse array of players from both receiving and sending countries; from leading international participants in the market such as the largest MTOs worldwide, leading international banks and the major card networks to small and medium paying RSPs operating in only one corridor.

• In terms of access instruments used to provide the service, the respondents were also quite diverse, with representatives from traditional cash–to-cash RSPs, account-to-account and account-to-cash service providers, card based RSPs as well as mobile payments operators. Overall the participants in this questionnaire represent more than 50% of the market for remittances worldwide. The coverage of the survey and the geographical and operational diversity of the respondents ensure that the answers received are representative of the sector.

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The features that appeared from the analysis of the questionnaire to the regulators were mostly confirmed by the answers received to this recent private sector survey:

• Private sector respondents confirmed the fact that they access payment systems as indirect participants through the services of direct participants, in particular banks. The non-bank RSPs did mention this as a major limitation to their operations and to the existence of a level playing field, since this intermediation increases their operational costs and makes them vulnerable to banks closing their accounts at any moment.

• In most cases no specific legislation or regulation seems to exist on transparency prices, except for the European Union Payment Services Directive which will be applicable only to payments inside the European Economic Area, and not for payments sent to third-party countries.

• Contrary to common understanding, licensing and registration requirements do not seem to be a major issue for competition in the market, except when used by governments as a means of discouraging the development of the private sector remittance services in favour of government-owned payment systems. Also, licensing and registration requirements are not considered by RSPs as a major factor driving prices up. However, most RSPs did mention the requirements for AML/CFT compliance or their interpretation by some other market players or authorities as their major operational expense and as a barrier to entry in the market for smaller players.

• RSPs of all types seemed to agree that prices were reduced in the last two years and that competition was the major factor driving prices down.

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WORKING TOWARDS A SOUND, PREDICTABLE, NON-DISCRIMINATORY, AND PROPORTIONATE LEGAL AND REGULATORY FRAMEWORK

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REMITTANCES SERVICES AS PART OF THE PAYMENT SYSTEM OVERSIGHT FUNCTIONS

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In order to efficiently standardise regulatory approaches, national authorities should explicitly consider the provision of remittance services as part of retail payment services and consequently include it in their oversight activities

– National authorities should carefully evaluate the special features of remittance services, in order to reduce discrepancies based on the type of institution providing the service or the payment instrument used. This even handed treatment will avoid discrimination and reduce risk.

– They should acknowledge the fact that non-financial institutions provide remittance services and that these entities deserve regulatory treatment on a level playing field with financial institutions.

– Outsourcing of activities should be clearly defined and considered.

– National authorities other than central banks and banking supervisory bodies are likely to be involved in regulation of non-financial institutions. This will require a clear definition of roles, policies, tools and remedies in order to avoid regulatory gaps and overlaps.

– These responsibilities and legal and regulatory requirements should be clearly stated and in the public domain.

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POSITIVE CONSEQUENCES OF A FUNCTIONAL APPROACH

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A functional approach would guarantee not only proportionality and non-discrimination, but also flexibility. Some requirements would apply to all RSPs, others could vary according to the nature of the scheme, the specific risks and the level of turnover

– All operators potentially able to provide remittance services should be permitted to do so directly, once they satisfy all due requirements. Subject to technical competence and adequate risk management, they should also be permitted to participate in clearing and settlement systems, at least as indirect participants

– Capital and liquidity requirements should be proportionate to the risks involved. In this context, a careful evaluation of the legal schemes used should be made, since risks are strongly influenced by the legal structure used

– In the event of outsourcing some components of the service, the RSP should be held responsible for the actions of their sub-contractors. Direct oversight of these contractors may be required, even if they are non-financial entities

– Consumer protection, including transparency and redress measures should be extended to all RSPs. This should apply in both the sending and the receiving country

– AML/CFT rules should be generally applicable, in conformity with existing international standards. These already allow variations according to the kind of transfers and their value. Identification and documentation requirements need to be proportionate since unduly onerous rules often lead to the use of unregulated channels.

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SELF-REGULATION

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Room should also be left for self-regulation. Self-regulation is

generally less bureaucratic, more flexible and cheaper than the

statutory alternative

– Self-regulation should ensure that contractual terms and technical developments offer consumers, many of whom are unsophisticated, adequate protection

– If there is no legal requirement to disclose prices, exchange rates and other conditions, self-regulation should mandate transparency on these issues

– Larger RSPs, using non proprietary agents, should always ensure that these agents are properly trained and cover their position with adequate contractual terms

– To these ends, codes of conduct or best practice codes for remittance services are highly recommended

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COMPETITION AND CONTESTABILITY

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Oversight should also consider competitive conditions and

contestability of markets

– In order to ensure a competitive market, it is essential for national authorities to ban exclusive agreements that significantly reduce competition and restrict the range of financial and non-financial institutions allowed to provide money transfer services

– Rules on access to clearing and settlement should not be used as a tool to restrict the market

– In the event that another national authority is in charge of competition issues and consumer protection, then oversight and regulation on competition should be implemented consistently

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CROSS-BORDER COORDINATION

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Some homogeneity in the cross-border regulation of remittances

is advisable, either by national regulation or standardization of

contractual terms, although the specific requirements of

individual countries should always be respected

– A general understanding of common standards or at least of some general basic principles could lead to economies of scale and consumer protection across countries

– These kinds of common parameters are also recommended for regions, where conditions are similar and where there are many intra-regional payments

– The involvement of the market, including smaller players, is essential for the development of standards

– Setting clear and consistent standards across jurisdictions, at least a common understanding of basic AML compliance on both sending and receiving sides, in order to be able to provide regulatory certainty to players

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CONCLUSIONS

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• Several approaches for the regulation and oversight of remittances services have been identified. They relate to three main areas:

– Access to the market and to clearing and settlement facilities;– Contestability of the market; and– AML/CFT identification of customers

• The five macro-recommendations in terms of standard approaches which have been identified in the previous sections, together with their specifications, could serve as the framework for action in each country.

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• Within such a framework, a number of concrete suggestions can also be made from national examples that appear to represent best practice.

• Although each of them should be tailor-made to the specific circumstances of a country and its legal system, these examples merit wider consideration and offer opportunities for improvements.

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Among them, the most relevant appear to be:

• Non-financial RPSs are allowed to pay remittances directly, or operate in the context of correspondent agreements, as in Brazil

• They have access to banking facilities, to be able to access clearing and settlement facilities at least indirectly. Since this might entail a risk for banks, national authorities must in parallel establish minimum requirements to access banking facilities

• Lower identification requirements under AML/CFT for small amounts with appropriate risk prevention mechanisms are put in place or the range of IDs accepted is increased, as in the Philippines

• Codes of conduct are adopted by the private sector and widely applied by the market, to make price and other service conditions fully transparent a common practice, as in the UK

• To reinforce consumer protection, national authorities make the above requirements a condition for being licensed or more generally authorised to operate as a RSP, as in Singapore, Malaysia and Thailand

• Exclusivity agreements are in principle banned, as in Nigeria or Russia

• In parallel, restrictions on clearing and settlement access conditions are strictly monitored to guarantee that they are reasonable and risk-oriented, as in the European Union

• RSPs can access all relevant information in an easy way, possibly by a one stop shop window, as in Japan

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Finally, three major tools for implementation of such standard approaches have been identified, namely:

• Consistent application of relevant regulation by all national authorities involved

• Direct involvement of the private sector through self-regulation and public/private partnerships

• Cross-border coordination